Millions are failing to save any money

Sunday, July 16, 2006

By Henry J. GomezPlain Dealer Reporter

Private pensions are largely the past. Social Security has a shaky future.

That leaves the American retirement system’s last leg: Your personal savings.
Hold on for dear life. For a lot of us, the stool could come crashing down.
The Employee Benefit Research Institute, in its 2006 Retirement Confidence Survey, estimates that most workers (53 percent) have less than $25,000 saved or invested toward their golden years. Thirty percent haven’t saved at all.
Why is the need to save such a hard concept to grasp?
“Maybe,” said Mark Haley, a portfolio manager at Cleveland’s Winfield Associates Inc., “people take more risks than they should be taking. Maybe those 45 and under get busy in their lifestyle. They forget to pay themselves first. They don’t realize that they can defer a sizable amount of their pay for retirement and then get that new car, new house or pay the bills.”
Some are too poor to save.
The U.S. poverty rate is hovering around 13 percent, according to U.S. Census Bureau numbers from 2004, the last year for which such data is available. You could argue that for 37 million people, eating tomorrow is more important than retiring comfortably at 65.
The poverty rate has increased each year since 2000, when 11.3 percent of Americans, or 32 million people, were living in poverty. Because Social Security payments later are linked to what people earn now, low-income workers will have less to live on in retirement.
The AARP estimates that severe financial problems await about 25 percent of future retirees who have empty savings accounts, no home equity, no insurance or no spouse.
Another 25 percent should be in solid shape for retirement. It could go either way for the remaining half.
The risks for the poor expand because retirement requires more savings now than in past decades. These days, a 65-year-old retiree could live for another 15 or 20 years – maybe more.
Each family makes its own choices
Then there are folks like Sharon Blake. She has money – but there are other priorities beyond her own retirement.
The 50-year-old Cleveland woman was 23 when she had her son, whom she raised by herself. She left her husband while she was still pregnant.
Blake, a manager at AT&T Inc., said she has not been able to save much for retirement. She has a pension but is worried about how high her health-care costs might be and the uncertainty of pension promises these days.
How does someone with a steady paycheck end up in this situation?
“I sacrificed everything for my son,” Blake said.
Day care became private school. “His tuition was more than my car note,” Blake said.
Then there were the extracurricular activities. Blake paid for Boy Scouts, swimming lessons, roller-skating, track, sports medical exams and summer camp. “I don't regret it,” she said.
“I wanted him to have a good start for the future.” (He did; he's out of the Navy now and in a good job.)
But when the AT&T union went on strike, Blake had to dip into savings to pay the bills. She also had some unexpected health problems and, thus, medical bills, in the last few years.
“I think there are a lot of single parents in the same situation,” Blake said.
Not just single parents.
Retirement is but one priority for most people, single or married, with or without children. It's also the priority that, stacked against others, is the easiest to put off, because it's so far off. Procrastination becomes less a character flaw and more a survival tactic.
“The problem lies more in the astronomical rising costs of housing, education and health care,” said Paul Lefelhocz, principal at the Cleveland office of Mercer Human Resource Consulting LLC, which offers retirement counseling and other financial advice.
Like Blake, many parents choose to send their kids to private schools and pay for their higher education.
If you've got the income to do it, you can have it both ways. Kathy Smith, a 32-year-old waitress from Cleveland, thinks she and her husband, Brian, a business analyst, have worked out a compromise.
Kathy Smith's income will go toward putting their two children through private school. Brian, 36, will be responsible for growing the retirement nest egg. His target is $600,000, but his wife would like it to be closer to $1 million.
“We have time to save,” Kathy Smith said. “The important thing to do is start early.”
Ideally, the Smiths' education fund would have enough left over for college. But even they have thought about priorities. “If it comes down to us dipping into our retirement money or them paying for college themselves, we'll let them pay,” Kathy Smith said. “You don't want to risk the future.”
Not all parents are ready to make that choice. And education is something you can plan for. Illness or accident? Not so much.
Sharon Pierce, 54, of Garfield Heights, processes disability claims at the U.S. Department of Veterans Affairs' Cleveland office. She has been a government employee for 32 years.
She is eligible for retirement next year, when she can begin receiving the money she has been storing in the Civil Service Retirement System, but “I won't retire,” she says. “I can't afford to.”
Pierce is single and has no children. She has diabetes and is legally blind. She can still read and “get around pretty good,” but the disability is enough to restrict her from driving. And being a diabetic with built-in medical costs and a family history of heart disease, Pierce worries she won't have enough money to pay the bills. She plans to stay at least five or 10 more years.
“With inflation going up, there's no guarantee of affordable housing and health care,” Pierce said. “I'm dependent on public transportation. Let's say I [would] get $4,000 a month. Right now, I could probably live on that. But could I live on that 10 years from now?”
Some do live beyond their means
Beyond those who don't earn enough or those who focus on other priorities, some Americans simply live beyond their financial means.
“We really have an economy that emphasizes consumerism,” said Kevin Jacques, who teaches finance at Baldwin-Wallace College in Berea. “You can call it psychology. You can call it marketing. But the fact is, consumerism is sexy. Saving is not.
“One of the things I show my students is that with a relatively small amount of savings in your 401(k) or IRA and average returns, you'll end up a millionaire. You should see the stunned expressions on their faces. We don't educate people enough.”
In 1990, the average credit card debt per household was $2,966, according to CardWeb.com, which tracks such trends. Today, it is $9,312.
Now, take the money you're paying to cover credit-card debt, put it into a retirement account and . . . yada, yada, yada – you know the rest.
Problem is, that type of preaching rarely works. How many times have you heard the “skip the daily latte” or “bring your lunch from home” advice? Yet the numbers say it's not getting through.
One reason: We find it easier to spot excess when we're looking at someone else. Few latte drinkers are thinking about such things when they get their daily caffeine fix.
Jerry Clavner, a 63-year-old who teaches sociology and anthropology at Cuyahoga Community College, said people must “learn to defer immediate gratification.”
Good advice. But even Clavner is uncertain about retirement.
“I will probably work until it really becomes difficult to do so,” said Clavner, who is worried about health costs. “Maybe they will take me out of my classroom on a gurney.”
There is one more group of people who are unprepared for retirement. They earn enough. They juggle their priorities. They watch their spending. But they're still behind.
Their problem? Their savings aren't earning enough.
A recent survey from the Profit Sharing/401(k) Council of America, a Chicago nonprofit, shows that about three in every four eligible workers has some money in a 401(k).
Most experts agree that you should contribute to a 401(k) if you can – especially if your contribution is matched. But 401(k)s, unlike the pension plans they often replace, leave the risk with employees, not employers. And that risk is higher for a lower-paid worker.
The council's survey said the average, pre-tax deferral for “non-highly compensated workers” was 5.4 percent of pay, compared with 6.7 percent of pay for the highly compensated employees. Not only does a low-scale worker have less to contribute, he has less – if anything at all – to spend on financial advice, and usually less knowledge on his own.
“You really need to have somebody or resources yourself to make those decisions,” said Haley, the Winfield Associates portfolio manager. “People get frustrated as well because they save their money, they think they're doing the right thing, but they're not making any money.”
Azim Nakhooda, chief investment officer at Pepper Pike's Cedar Brook Financial Partners, said the average investor receives a 3.9 percent annual return. An institutional or high-net-worth investor makes more than triple that – a 12.9 percent annual return.
“The rich always seem to get richer,” he said.
Nakhooda theorizes that the “smart money” institutional and ultra-wealthy investors have more diversified portfolios beyond the three main classes of financial assets.
“It's not just stocks, bonds, cash,” he said. “Smart money has always had relevant portions of their portfolio” in hedge funds, real estate and private equity, thus bringing higher returns.
These often are asset classes that “regular investors don't have access to,” Nakhooda said.
But Nakhooda also said the best way to gain access to such lucrative investments is through a financial planner – an expense, from a few hundred to several thousand dollars a year, that some “regular investors” can't afford.
Some workers may be able to receive help through their employers.
According to the PSCA survey, 57 percent of 401(k) plans include advice. The most common form is one-on-one counseling, with Internet providers a close second.
That's better than nothing, Haley said. Workers have to take advantage of such help.
“They have the resources,” he said, “you just have to ask them.”
For younger workers, at least there's time
Unfortunately, much of this advice is moot for many people.
If you're older than 50 and haven't started saving yet, there's not enough time to make up the difference. If you're older than 30 and haven't been socking away money, you would have to make major changes very soon.
There is hope for the younger generation.
According to a survey from Diversified Investment Advisors, which offers retirement advice, 70 percent of all respondents age 18-26 who were eligible for a 401(k) plan said they were contributing. Thirty-seven percent said they expected to start saving for retirement before age 25, and 46 percent of those who were already working were doing so.
Of course, these young workers run the same risk as their elders: Dipping into a rainy-day fund too early; cashing out or borrowing against a 401(k) to buy a new house or car, or to pay for an unexpected surgery.
That's why Baldwin-Wallace's Jacques, a former senior financial economist for the U.S. Department of the Treasury, says that better financial education is the only true hope.
Jacques often lectures about saving for retirement, but he believes the class would be better taught to elementary school students, or at least those in junior high.
“If you truly want to make people financially literate, you have to start at a young age,” he said. “It's still going to take a generation to solve the problem.”
To reach this Plain Dealer reporter: hgomez@plaind.com, 216-999-5405